It Might Not Be A Great Idea To Buy CanWel Building Materials Group Ltd. (TSE:CWX) For Its Next Dividend
CanWel Building Materials Group Ltd. (TSE:CWX) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 29th of September in order to receive the dividend, which the company will pay on the 15th of October.
CanWel Building Materials Group's upcoming dividend is CA$0.12 a share, following on from the last 12 months, when the company distributed a total of CA$0.48 per share to shareholders. Based on the last year's worth of payments, CanWel Building Materials Group has a trailing yield of 7.2% on the current stock price of CA$6.69. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for CanWel Building Materials Group
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. CanWel Building Materials Group paid out 187% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 29% of its free cash flow as dividends, a comfortable payout level for most companies.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and CanWel Building Materials Group fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see CanWel Building Materials Group's earnings per share have dropped 6.9% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. CanWel Building Materials Group has seen its dividend decline 7.1% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.
To Sum It Up
Is CanWel Building Materials Group worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 187% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of CanWel Building Materials Group.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with CanWel Building Materials Group. For instance, we've identified 3 warning signs for CanWel Building Materials Group (1 is potentially serious) you should be aware of.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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